The move was welcomed by the Institute of Directors. Labour, though, was quick to dismiss the plan as a "tax cut on the never-never" that undermined David Cameron's pledge to be tougher than the present government at cutting the national debt.

Alistair Darling, the chancellor, said: "This would derail the recovery this year, undermine deficit reduction, and put public services at risk. George Osborne has panicked and is making policy up on the hoof."

Rather than reversing the 1% rise outright, Osborne's plan is to cut NI for low- and middle-income workers by changing the thresholds at which the tax is levied. He said that the primary threshold at which employees start to pay national insurance would rise by £24 a week. This would mean that everyone earning under £35,000 would be protected from the planned rise in national insurance announced by Darling in the budget. The upper earnings limit would be increased by £29 a week.

"Compared to life under Gordon Brown, every national-insurance payer earning between £7,100 and £45,400 will be up to £150 better off," Osborne said. He also plans to raise the threshold at which employers pay NI on their workers' earnings, by £21 a week.

Osborne's announcement is a sign that national insurance will be a key issue in the general election campaign. Today, employees pay NI on all income over £110 per week, up to £844 a week, at a basic rate of 11%. Earnings above £844 a week (the upper accruals limit) are charged at 1%. Companies pay NI at a flat rate of 12.8% on all earnings by employees over £110 a week.

Osborne dubbed Darling's plans "a tax rise on almost all jobs", and "the economics of the madhouse", claiming it was a mistake to increase the tax burden in this way.

Two former government advisers, Sir Peter Gershon and Dr Martin Read, have helped the Conservatives spot public spending savings to finance Osborne's proposed changes. Phillip Hammond, the shadow chief secretary to the Treasury, explained that this would allow £12bn of savings to be delivered "from a standing start" in 2010-11.

Half will be ploughed back into frontline public services, leaving £6bn to fund a smaller tax-take from NI than under a fourth-term Labour government.

Hammond outlined a five-point plan to cut public spending. New IT projects would be shelved, with ongoing projects cancelled if they were not delivering value; contracts with suppliers would be renegotiated; some public sector vacancies would not be filled; discretionary spending on IT services and personal expenses would be reined in; and underused property would be closed down or sold off.

Darling said last week that the government had earmarked £11bn of efficiency savings, but that it did not plan to start cutting back until 2011-12 – when the UK economy should be in more robust shape.

Labour launched a fierce attack on Osborne's plan this morning. Ed Miliband, the climate change secretary, told BBC News that Osborne's calculations were "back of the fag-packet figures which no one is going to believe".

He added: "It's a panicky move by the Conservative party, but people won't be taken in."

Darling said: "What George Osborne announced today will put families, their public services and business at risk. On the Tories' own figures, they've made a £28bn tax promise over the next parliament, but not a single one of their savings is in the bank. It's paid for on a wing and a prayer ... George Osborne's savings are so flaky, he's admitted he doesn't even know which department is going to pay what."

Darling's planned NI rise has proven unpopular with business leaders, with one group claiming it would cost 57,000 jobs across Britain's small and medium-sized businesses.

Miles Templeman, director general of the Institute of Directors, said he backed Osborne's plans.

"All organisations, irrespective of whether they are in the public or private sector, should be looking to operate more efficiently. The Conservatives are right to target the UK's £220bn public procurement budget, but the devil will be in the detail," Templeman said.

The British Retail Consortium also said that it welcomed raising the NI thresholds, but argued that the shadow chancellor should have gone further.

"Any increase to national insurance is a tax on jobs and undermines retailers' ability to maintain and create employment. Raising national insurance will hamper retailers' ability to maximise their contribution to the recovery," said the BRC's director general, Stephen Robertson.

"The Conservative proposals to reduce national insurance payments are a step in the right direction, but should go further by scrapping the full increases. We'll need to examine the detail of how the reductions in national insurance will be paid for, but it must focus on public spending efficiencies, rather than tax hikes."

Tonight Osborne, Darling and Vincent Cable, the Liberal Democrats' Treasury spokesman, will take part in a TV debate – Ask the Chancellors – on Channel 4.

About this article

George Osborne: National insurance changes will be paid for by £6bn cut in spending

This article was published on
the Guardian website
at 10.25 EDT on Monday 29 March 2010.
It was last modified at 16.01 EDT on Wednesday 11 June 2014.
It was first published at 07.28 EDT on Monday 29 March 2010.